Bollinger Bands

Bollinger Bands are a volatility-based indicator consisting of three lines that create a dynamic envelope around price – a middle moving average and two outer bands set at standard deviations above and below. Created by John Bollinger, these upper indicator bands expand during volatile periods and contract during quiet consolidation, providing a visual representation of when price is stretched or compressed. For option traders, Bollinger Bands excel at identifying overbought and oversold conditions, spotting volatility squeezes before big moves, and providing precise levels for strike selection. The bands’ ability to adapt to changing market conditions makes them invaluable for timing option sales when price reaches extremes.

How Bollinger Bands Work

Three components create the envelope:

Band Components

  1. Middle Band: 20-period SMA (default)
  2. Upper Band: Middle Band + (2 × Standard Deviation)
  3. Lower Band: Middle Band – (2 × Standard Deviation)

The bands contain approximately 95% of price action.

Standard Settings

  • Period: 20 (one month of trading days)
  • Standard Deviations: 2.0
  • MA Type: Simple Moving Average

Can be adjusted but defaults work well.

Band Characteristics

  • Wide Bands: High volatility period
  • Narrow Bands: Low volatility period
  • Expanding Bands: Volatility increasing
  • Contracting Bands: Volatility decreasing

The bands breathe with market volatility.

Bollinger Band Signals

Key patterns from this upper indicator:

Band Touches and Pierces

Upper Band Touch:

  • Price at 2 standard deviations high
  • Statistically overbought
  • Reversal probability high
  • Sell calls above upper band

Lower Band Touch:

  • Price at 2 standard deviations low
  • Statistically oversold
  • Bounce probability high
  • Sell puts below lower band

Wait for price to reverse before entering.

Walking the Bands

Riding Upper Band:

  • Strong uptrend behavior
  • Multiple touches without reversal
  • Don’t fight this strength
  • Wait for middle band break

Riding Lower Band:

  • Strong downtrend behavior
  • Persistent weakness
  • Don’t catch falling knife
  • Wait for trend exhaustion

Strongest trends walk the bands.

The Bollinger Squeeze

Most powerful band pattern:

Identifying Squeezes

  • Bands reach 6-month narrow point
  • Volatility compressed to extreme
  • Big move imminent
  • Direction unknown

Like a coiled spring ready to explode.

Trading the Squeeze

Pre-Breakout:

  • Avoid selling options
  • Premium too low
  • Consider buying options
  • Wait for direction

Post-Breakout:

  • Bands expand rapidly
  • Trade breakout direction
  • Sell options on pullbacks
  • Volatility returns

Squeezes precede the biggest moves.

Bollinger Band Strategies

Systematic approaches for options:

Mean Reversion Strategy

Setup:

  1. Price pierces outer band
  2. Reversal candle forms
  3. Re-enters bands
  4. Sell appropriate option

Put Selling Example:

  • Price pierces lower band
  • Hammer candle forms
  • Closes back inside bands
  • Sell puts below spike low

Band Width Indicator

Measure band width for context:

  • Current width vs average
  • Extremely wide = reversal soon
  • Extremely narrow = breakout soon
  • Guides strategy selection

Double Bollinger Bands

Use 1 SD and 2 SD bands:

  • 1 SD bands = normal range
  • 2 SD bands = extreme range
  • Multiple zones for entries
  • Better strike selection

Bollinger Bands for Options

Specific applications:

Strike Selection

Conservative Approach:

  • Sell strikes outside bands
  • Extra statistical edge
  • 95% probability
  • Lower premium

Aggressive Approach:

  • Sell strikes at bands
  • Higher premium
  • ~95% probability
  • More management

Volatility Assessment

Wide Bands:

  • High IV environment
  • Larger strikes distances needed
  • Better premiums available
  • Active management required

Narrow Bands:

  • Low IV environment
  • Strikes can be closer
  • Premium challenging
  • Squeeze developing

Advanced Bollinger Techniques

Sophisticated applications:

%B Indicator

Shows where price is within bands:

  • %B = (Price – Lower Band) / (Upper Band – Lower Band)
  • Above 1 = Above upper band
  • Below 0 = Below lower band
  • 0.5 = At middle band

Quantifies band position precisely.

Band Divergences

Bullish Divergence:

  • Price lower low
  • Lower band higher low
  • Volatility contracting on decline
  • Bullish reversal setup

Bearish Divergence:

  • Price higher high
  • Upper band lower high
  • Volatility contracting on rally
  • Bearish reversal setup

Combining Bollinger Bands

Power combinations:

Bands + RSI

Oversold Perfection:

  • Price at lower band
  • RSI below 30
  • Double confirmation
  • High probability put sale

Overbought Perfection:

  • Price at upper band
  • RSI above 70
  • Double confirmation
  • High probability call sale

Bands + Volume

Exhaustion Patterns:

  • Band pierce + volume spike
  • Capitulation/euphoria
  • Reversal imminent
  • Size up position

Bands + Support/Resistance

Confluence Trades:

  • Lower band at major support
  • Upper band at major resistance
  • Technical alignment
  • Highest probability

Common Band Mistakes

Fighting Band Walks: Strongest trends persist Ignoring Squeezes: Missing big moves Wrong Settings: Over-optimizing No Confirmation: Bands alone insufficient

Bollinger Band System

Building systematic approach:

Daily Band Trading

Morning Routine:

  1. Scan for band touches
  2. Check for squeezes
  3. Note band width
  4. Plan option trades
  5. Set alerts

Weekly Options with Bands

Entry Rules:

  1. Price pierces band
  2. Reversal candle forms
  3. Confirm with momentum
  4. Sell weekly option
  5. Target middle band

Position Management

  • Exit at middle band touch
  • Stop if breaks beyond bands
  • Trail using band position
  • Adjust for volatility

Special Band Patterns

Unique formations:

M-Tops and W-Bottoms

M-Top (Bearish):

  • First high at upper band
  • Pullback to middle
  • Second high fails at band
  • Sell calls aggressively

W-Bottom (Bullish):

  • First low at lower band
  • Rally to middle
  • Second low holds above band
  • Sell puts aggressively

Band Squeeze Breakout Failure

  • Squeeze breakout occurs
  • Quickly reverses
  • False move trapped traders
  • Trade reversal aggressively

Key Takeaways

Bollinger Bands:

  • Upper indicator creating price envelope
  • Middle band (20 SMA) with 2 SD bands
  • Expand with volatility, contract when quiet
  • Identify extremes and squeezes
  • Adapt to market conditions
  • Guide strike selection
  • Statistical edge for option sellers

Bollinger Bands are the option seller’s statistical edge, showing when price has moved too far too fast and is likely to revert. This upper indicator’s dynamic nature adapts to any market condition, expanding to accommodate volatility and contracting to warn of impending moves. Master Bollinger Bands to identify high-probability reversal points and volatility cycles. Remember: the market lives within the bands 95% of the time – use this statistical reality to your advantage.